Tuesday, November 14, 2006

Review of Franklin Templeton Capital Safety Fund (FTCSF)

Franklin Templeton Investments (India) has launched Franklin Templeton Capital Safety Fund (FTCSF), the first of the many 'Capital Guaranteed' schemes slated to hit the markets soon.

The scheme endeavors to protect the capital by investing in high quality fixed income securities as the primary objective and generate capital appreciation by investing in equity and equity related instruments as a secondary objective. Franklin Templeton launches Capital Safety Fund)

Offer opens: October 31, 2006
Offer closes: November 30, 2006
Entry load: Nil
Exit load: Nil
Minimum investment: Rs 10,000
Type of fund: Close-ended
Tenure: 3-years and 5-years
Benchmark: Crisil MIP Blended Index
Fund Managers: Santosh Kamath (debt) and Satish Ramanathan (equity)
Franklin Templeton Capital Safety Fund offers a 3-year and a 5-year plan. Being a close-ended fund, the fund will not repurchase units of the scheme before the end of the maturity period. (Check out - New Fund Offers open now)

Experts believe that though such schemes offer the investor the opportunity to have his cake and eat it too, investors should note that this doesn't come without having to make some compromise.

1) Limited Equity Upside

“In Franklin Templeton Capital Safety Fund, capital guarantee would mean a minimum of 70% of the funds invested in fixed income securities for the 3 year plan and a minimum of 80% of the funds invested in fixed income for the five year plan. Therefore, equity upside, if any, would be limited to the 20% and the 30% portion invested in equity respectively”, says investment expert Sandeep Shanbhag.

Review of Franklin Templeton Capital Safety Fund (FTCSF) However, Sukumar Rajah, CIO - Equity, Franklin Templeton clarifies that, “FTCSF allocates a major proportion of its portfolio to high quality debt investments in order to protect capital and the remainder is in equities so that investors can benefit from the upside potential of Indian equities over the long term.” “Investors comfortable with the near term volatility and looking for potentially higher returns should look to invest in well-managed diversified equity funds with an established track record over market cycles”, he added.

2) Capital Protection is NOT Guaranteed
The fund house, per se, does not guarantee that the capital will be protected. Instead what the capital guarantee means is that CRISIL has assigned a rating to the scheme that signifies a high degree of certainty regarding timely repayment of the face value of the investment.
Sukumar agrees as he says that regulations do not permit mutual funds to offer any “guarantee” pertaining to returns or safety of capital on their products. However, he assures that the portfolio structure of FTCSF is designed in such a way that investors are likely to get Rs.100 back for every Rs.100 invested.

He clarifies, “The chances of an erosion of capital are low given the structure of portfolio. The ability of this fund’s portfolio structure to deliver capital protection is also affirmed by CRISIL through an AAA (SO) rating, which indicates “a high degree of certainty regarding the timely repayment of principal”. Debt investments will be in AAA or equivalent securities that match the maturity profile of the fund, minimizing both credit & interest rate risk. The chances of a capital erosion from the debt portfolio are minimal given the near-zero default ratio for AAA rated securities by CRISIL.” 

”The portfolio allocation is determined in such a way so as to provide enough cushion to mitigate credit, reinvestment, float and liquidity risks along with transactions costs. In addition, the portfolio will be monitored by the rating agency on a monthly basis to determine the probability of the portfolio value falling below the original principal value and this would necessitate any changes to the portfolio. As part of the investment process, we will be closely monitoring the credit quality of our investments and would proactively shift investments into good quality papers, if we sense a change in the issuers’ fundamentals”, he added.

3) Liquidity – A Concern?
Current Sebi regulations do not allow a fund house launching a capital protection scheme to provide for an exit window to the investors. “Though the fund is planning to get the fund listed on the NSE in an attempt to offer some exit option, it'll not be the same as having the facility of redeeming units directly with the fund house”, said advisor Hemant Rustagi.

Sukumar counters as he says, “This fund is not meant as an alternative to equity investments, it is positioned as an attractive alternative for conservative investors used to parking their long term money in traditional fixed income avenues, where there is a chance of getting low inflation-adjusted returns.”

All said, experts believe that FTCSF would prove to be a good investment for the risk averse investor who doesn't mind compromising on his returns for the additional implied safety. 

Get more information


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So far, at least, they look to have made a wise choice.
• Since the start of December '07, the average UK house-price has dropped by 16% (Halifax data);
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• The Gold Price in Sterling, in contrast, has risen by more than one-third, up by 33.4% and hitting a series of all-time record highs throughout November above £550 an ounce.
Manufacturing output, meantime – a key target for the Bank's devaluation policy – has contracted by around 10% (PMI index), even as the Pound in your pocket lost one-fifth of its international value on the currency markets.
Here at home, the Pound has lost 3.7 pence of its purchasing power since Base Rate began its descent from 5.75%...down at a near-record pace to just 2.0% today. Cash savers have been hammered by Bank of England policy, in short. And now, like pretty much all government wonks everywhere, the "businessfriendly" socialist authorities are planning to borrow the nation out of its debt-led deflation.

Tempelton Capital says that will only hurt gilt investors in turn, of course, most especially those hapless fund clients being fed into 5- and 20-year gilts at near-record low yields. Little wonder so many private individuals are opting out of official paper entirely, choosing un-inflatable, un-indebted gold as a bolt-hole for a portion of their wealth.

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